Companies:

RELATED QUOTES

Star managers often run almost identical 'mirror' funds with lower fees. But
does this make them a more attractive option?

Can you get a star fund manager to run your money for a third of his or her
normal fee? It's perfectly possible, although many financial advisers may
not point out that you have this option.

Many big-name fund managers run smaller investment trusts alongside their
larger, more popular funds. Typically the two funds will invest in a similar
portfolio of shares, but the annual management charges on the investment
trust can be far lower.

Take Neil Woodford, one of Britain's best-known and most successful fund
managers. He runs the £8bn Invesco Perpetual Income fund, one of the
bestselling funds in the country. Like most unit trusts it has a 1.5pc
annual management fee, plus a 5pc initial charge, although investors can
avoid this if they buy through a discount broker.

Less well known is the fact that Mr Woodford also runs the Edinburgh
investment trust, which has a similar mandate. Here there is no initial
charge, just an annual management fee of 0.6pc. The dividend yield on the
investment trust is also higher, standing at 4.9pc at present, compared with
just 4pc on the unit trust.

This is not a one-off example. Investors in Templeton's Emerging Markets
offshore unit trust, run by the veteran manager Mark Mobius, pay a 1.6pc
annual charge. But owners of Templeton's Emerging Markets investment trust,
run by the same Mark Mobius and with an almost identical mandate, pay just a
1pc charge a year.

Assuming that the two portfolios deliver a similar performance, these lower
fees can have a significant impact on returns over longer periods.

Jason Hollands, the managing director of Bestinvest, the advisory firm, said: "In
the past five years those holding Harry Nimmo's unit trust have seen a £100
investment grow to £139. But those who invested £100 in his investment trust
five years ago are sitting on shares worth £207."

The Invesco Perpetual Income unit trust has turned £100 into £116 over five
years, while the "mirror" investment trust is now worth £139;
Jupiter European's unit trust has turned £100 into £141 today, but its
equivalent investment trust is worth £164.

Philippa Gee, who runs her own wealth management firm, said charges were
higher on unit trusts because the annual management charge (AMC (Taiwan OTC: 3585.TWO - news) ) included
commission and advice costs. But as this is bundled up within the product
charges, investors will pay this in full even if they have bought the fund
direct.

In contrast, investment trusts do not pay commission to advisers to sell their
products. This perhaps explains why the charges are lower and why these
products are not so widely sold. Ms Gee said: "For too long investment
trusts have been completely avoided by certain types of adviser because they
did not generate a commission remuneration for them."

She (SNP: ^SHEY - news) said new rules due to come into force in January "should drive an
army tank through this biased approach". These rules will ban
commission payments on investments and pensions, and require independent
advisers to consider all type of investment, including investment trusts.

Of course, although "mirror" unit and investment trusts may invest
your money in similar portfolios, they are fundamentally different. The main
difference is that an investment trust issues a fixed number of shares,
which are listed on the stock market in the same way as any other listed
company. In contrast, a unit trust is "open-ended" and will simply
cancel or create "units" in response to investor demand.

This can have a significant effect on pricing. The price you pay to buy or
sell a holding in a unit trust will depend solely on the current value of
the assets under management. However, demand for the limited number of
investment trust shares can force prices up, so shares can trade at a
premium to the underlying value of the assets. Of course, the reverse is
also true, and shares can sell at a significant discount to the actual value
of the assets in the trust.

This can make investment trusts riskier than unit trusts. For example,
Standard Life's Smaller Companies trust, managed by Mr Nimmo, is currently
trading at a 5.7pc premium. In other words, you are paying almost £1.06 for
every £1 of assets held by the fund. However, Templeton's Emerging Markets
trust stands at a 7pc discount, so you have to hand over only 93p to buy £1
of assets. This may look like a bargain, but don't forget that discounts can
widen, as well as narrow, just as premiums can fall. When Anthony Bolton
managed Fidelity's Special Situations investment trust it traded at a 14pc
premium; today, after the loss of this star manager, it trades at a 10pc
discount.

This isn't the only additional risk factor. Unlike unit trusts, investment
trusts can borrow money to buy additional assets. This "gearing"
can boost returns in a rising market, but can also magnify losses.

Such structural differences mean that investment strategy may vary, even if
the mandates of the funds are the same. For example, a unit trust may hold a
greater proportion of its assets in cash or highly liquid securities so that
it can redeem investors' money when needed. This can lead to performance
differences, which may or may not favour investment trusts, depending on
market conditions.

However, Annabel Brodie-Smith of the Association of Investment Companies, the
investment trust trade body, said: "Having a 'closed-ended' structure
allows [investment trust] managers to take a long-term view without having
to worry about inflows and outflows of money, giving them greater investment
flexibility."

Damien Fahy of FundExpert.co.uk said: "While the headline AMCs may be
attractive, don't forget that investors will still encounter other charges,
such as dealing charges and bid-to-offer spreads. Some also charge
performance fees."

Many advisers pointed out that when the new rules came into force next year,
investment trusts might not retain their price advantage. Once fund managers
are banned from bundling commission charges into their product fees, the AMC
on a unit trust is expected to be between 0.75 and 1pc a year. Investors
will pay additional fees, though, if they receive advice or buy through one
of the "platforms" that many execution-only brokers operate. But
those buying investment trusts through stockbrokers or advisers may face
similar charges.

Juliet Schooling of Chelsea Financial Services said: "It isn't just
annual fees that investors need to look at, it's the total cost of buying,
selling and owning the fund." Performance can be as important as
charges, she pointed out. The Fidelity Special Value investment trust has
significantly lower charges, but the equivalent unit trust has performed
better over both three and five years.

Mark Dampier of Hargreaves Lansdown said: "Investment trusts are niche
products for more sophisticated investors who are comfortable with the
discounts and premiums. But if everyone who bought Neil Woodford's fund
piled into the investment trust, the premium would be so large that there
would be no advantage."

Yahoo UK & Ireland Finance

Also On Yahoo

Quotes are real-time for NASDAQ, NYSE, and NYSEAmex when available. See also delay times for other exchanges. Quotes and other information supplied by independent providers identified on the Yahoo! Finance partner page. Quotes are updated automatically, but will be turned off after 25 minutes of inactivity. Quotes are delayed at least 15 minutes. All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.